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I was logging into my account at USAA today and something on the front page caught my eye. They were advertising a secure credit card with an APR of 9.9%

In this case, the security is in the form of a 2-yr CD at today's standard absurdly low rate. The value of your CD is your credit limit. I have been familiar with the concept of secured cards for a long time, but it never ocurred to me that there would be an APR on them if you ran a balance. You are borrowing your own money. There is zero risk to the bank, and I suspect the administration of having to collect on a bad debt isn't anywhere near 9.9%, not to mention they are still making money off of your CD deposit.

I am currently looking for a post-military-retirement job, and I think I'm looking at the wrong kinds of jobs. How do I get into the secured credit card business?

v/r
Tom
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There is zero risk to the bank, and I suspect the administration of having to collect on a bad debt isn't anywhere near 9.9%, not to mention they are still making money off of your CD deposit.

There is also fraud risk.

Many secured cards have much higher interest rates. Compared to what I have heard, this appears reasonable.
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How do I get into the secured credit card business?

Leave the gun. Take the cannoli.
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vkg,

You wrote, There is also fraud risk.

What fraud risk? Is this there more fraud risk specific to a secured credit card? In this case, the bank has money on account as surety for payment. The cardholder fails to pay, the bank can refuse to redeem their CD...

Also, Many secured cards have much higher interest rates. Compared to what I have heard, this appears reasonable.

I would agree. 9.9% isn't all that bad a rate. I assume that's based on the card holder carrying a balance and only paying a minimum...
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What fraud risk? Is this there more fraud risk specific to a secured credit card? In this case, the bank has money on account as surety for payment. The cardholder fails to pay, the bank can refuse to redeem their CD...

Covering fraudlent charges is part of the cost of doing business.
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vkg,

I wrote, What fraud risk? Is this there more fraud risk specific to a secured credit card? In this case, the bank has money on account as surety for payment. The cardholder fails to pay, the bank can refuse to redeem their CD...

To which you replied, Covering fraudlent charges is part of the cost of doing business.

But the interest rate charged has nothing to do with covering fraudulent charges.

Credit card companies and bank haven't received an interest payment from me in well over a decade. They still seem to want my business and still seem to be willing to take on the fraud risk.

I believe the cost of fraud is built into the cost of merchant fees. Credit card interest rates are primarily a function of default risk and interest rate risk (and profit), with a small amount attributable to the cost of loan servicing. Fraud risk is associated with the initial borrowing transaction and is born almost entirely by the merchant through merchant fees, charge-backs and offsets.

Of course merchants tend to pass this back to customers in the form of higher prices. But they don't do any of this based on whether or not you have a secured credit card.

- Joel
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Tom,

Well think about the alternative from the business's point of view. They are likely paying interest on that CD. They are paying for printing your card, sending you statements, and running your charges. The potential clients for this product either have little financial history or a poor financial history. These are not clients who will run $2-5k a month through the card so you can collect fat merchant fees (think business travel credit cards). Now you're supposed to offer this special product for free? Why bother. They are offering it with a very reasonable fixed rate and letting the client set the credit limit (what are you willing to tie up in the CD). I've heard plenty of complaints from people who apply for secured cards and get 15-25% interest rates and $500 credit limits.

Honestly anyone in the position where they need a secured card should be paying it off in full every month (barring big emergencies) to learn better habits.

Lara Amber
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In this case, the security is in the form of a 2-yr CD at today's standard absurdly low rate. The value of your CD is your credit limit. I have been familiar with the concept of secured cards for a long time, but it never occurred to me that there would be an APR on them if you ran a balance. You are borrowing your own money. There is zero risk to the bank, and I suspect the administration of having to collect on a bad debt isn't anywhere near 9.9%, not to mention they are still making money off of your CD deposit

Isn't the CD used as collateral in the case of a person defaulting and not paying on the credit card?

For the normal user, they would put charges on the secured credit card, make a payment, and possibly carry a balance. If they do carry a balance on the card, the 9.9% interest rate is the cost of the financial institution loaning money to the secured credit card user.

The CD has little to do with the interest rate. It is being held as collateral in the event the person defaults. 9.9% is a decent rate, so I'm guessing the financial institution is giving a discount on the credit card interest because they do have the collateral if something goes south.
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Isn't the CD used as collateral in the case of a person defaulting and not paying on the credit card?

Yes, and in fact, the card company generally has to go through a bunch of hoops in order (i.e. waiting for the customer to be at least 6 months delinquent (thereby foregoing 6 months of collecting interest on the loan), writing off the loan, and possibly suing the borrower to get a judgement, depending on the state's laws) in order to seize the collateral. So, even if the borrower is perceived to be 'borrowing against their own money' - there are a lot of costs to the lender in order to claim that money from the borrower in case of default.

For the normal user, they would put charges on the secured credit card, make a payment, and possibly carry a balance. If they do carry a balance on the card, the 9.9% interest rate is the cost of the financial institution loaning money to the secured credit card user.

The CD has little to do with the interest rate. It is being held as collateral in the event the person defaults. 9.9% is a decent rate, so I'm guessing the financial institution is giving a discount on the credit card interest because they do have the collateral if something goes south.


Since those who get secured cards generally only do so if they can't get an unsecured card (usually due to poor or no credit history), 9.9% is probably a significant discount from the 30%+ rates that they would probably pay for an unsecured card.

And of course, if the borrower didn't want to pay interest, they could always close the credit card account, close the CD and use the cash from the CD to make their purchases. If the borrower is carrying a balance on a secured card, it's their choice in how to spend their money.

AJ
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You are borrowing your own money. There is zero risk to the bank, and I suspect the administration of having to collect on a bad debt isn't anywhere near 9.9%, not to mention they are still making money off of your CD deposit.

How are 'they making money off your CD deposit' if you are really 'borrowing your own money'?

If you are really 'borrowing your own money' then they can't lend it to anyone but you, because even if you have a current balance of $0, you might go and max out your credit limit tomorrow. In order to pay the merchant for the purchase that you made, they would have to keep your money separate from everyone else's so that they could send almost all of your money (minus any merchant fees) to the merchant when you did that. In that case, they can't 'make money off your CD' if you aren't paying any interest to them.

And if you say, 'but they are lending your money out to other people', then you aren't really 'borrowing your own money', are you?

As far as administration costs to seize that money if you default - yes, there is a lot of administrative costs. First, the bank has to write off the debt, which means 6 months with no payments made to the bank, but they still have to send out statements and probably are making calls to try to collect on the debt. Then, depending on the laws where you are, they may have to get a judgement against you to seize the money, meaning lawyers and court fees. And if you declare BK during the time before they collect, there will be BK court costs to prove that they really have the right to the money, and it shouldn't be divided among all the creditors.

So, that doesn't sound like 'zero risk' to me.

I am currently looking for a post-military-retirement job, and I think I'm looking at the wrong kinds of jobs. How do I get into the secured credit card business?

If you are going to limit yourself to actually lending people their own money and not charge them any interest if they carry a balance, then you won't be in business for long.

AJ
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2. Unfair Issac dings your FICO Score for having a secured CC.


I've heard this rumor many times, but I'm unaware of such a thing ever occurring in fact. I've had one and did not experience a lowered score because of it. I've found no evidence of any differentiating clue on my credit report between a secured card and a regular card, and neither have I been able to uncover any evidence of a card company reporting them any differently.

xtn
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